Zero Rated Supply under GST

Zero Rated Supply under GST

Under the GST framework, the concept of zero-rated supply is of significant importance, especially for businesses engaged in exports and supplying to Special Economic Zones (SEZs).

Zero-rated supply refers to the supply of goods or services that are either exported or supplied to SEZs and are not subject to GST in India. The main objective behind zero-rating supplies is to promote exports and SEZs, which play a vital role in the Indian economy.

Exports of goods and services have always been a critical driver of economic growth and development, and the zero-rated supply provisions under GST provide a significant boost to Indian exporters by enabling them to compete in the global market. Furthermore, zero-rating supplies to SEZs help in creating a conducive environment for businesses and promoting investments in the SEZs.

Zero-rated supply in GST: Concept and legal framework

Zero-rated supply refers to the supply of goods or services that are exempted from GST under GST law in India. It is important to note that zero-rated supplies are distinct from exempt supplies, as exempt supplies do not attract any tax, while zero-rated supplies attract tax but are eligible for input tax credit (ITC) benefits. The main objective behind zero-rating supplies is to promote exports and SEZs, which play avital role in the Indian economy.

The provisions for zero-rated supplies are contained in Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017, which deals with the entitlement of ITC on exports or zero-rated supplies. 

Section 16(1) of the IGST Act provides that a registered person making zero-rated supplies shall be eligible to claim a refund of the unutilized input tax credit (ITC) on goods or services or both that are used for such supplies. 

Section 16(2) of the IGST Act further provides that a registered person making zero-rated supplies may either export the goods or services under bond or Letter of Undertaking (LUT) or claim refund of the unutilized ITC.

Additionally, Section 2(6) of the IGST Act defines “zero-rated supply” as any taxable supply of goods or services or both:

1. Export of goods or services or both; or

2. Supply of goods or services or both to a Special Economic Zone (SEZ) developer or an SEZ unit.

Exports of goods or services are considered zero-rated supplies as they are intended for consumption outside India and are not subject to GST.

To qualify as zero-rated supplies, the exporter must comply with the necessary documentation and procedure for shipping the goods or services and adhere to the prescribed timelines for filing returns.

Supplies of goods or services to SEZ developers or units are also considered zero-rated supplies. The SEZ scheme was introduced to promote exports and generate employment opportunities in the country. The supply of goods or services to SEZs is exempt from GST, provided that the supplier obtains a Letter of Undertaking or furnishes a bond with the proper authorities. SEZs have their own set of regulations and are governed by the SEZ Act, 2005.

In conclusion, zero-rated supplies play a crucial role in promoting exports and SEZs in India. The legal framework for zero-rated supplies is provided under the IGST Act, and businesses engaged in such supplies can claim ITC refunds or opt for the Bondor LUT route. Exports of goods or services and supplies to SEZs are two examples of zero-rated supplies under GST in India.

Export of goods or services as zero-rated supplies:

Export of goods or services is a crucial driver of economic growth and development in India. Under the Goods and Services Tax (GST) regime, exports of goods or services are considered zero-rated supplies, which means they are exempt from GST. The main objective behind zero-rating supplies is to promote exports and help Indian businesses compete in the global market.

Export under GST refers to the supply of goods or services that are intended for consumption outside India. The term “export” is defined under Section 2(5) of the IGST Act, 2017, which states that “export of goods” means taking goods out of India to a place outside India. Similarly, “export of services” means the supply of any service when:

1. The supplier of service is located in India

2. The recipient of service is located outside India

3. The place of supply of service is outside India

4. The payment for such service is received in convertible foreign exchange

For exports to be considered zero-rated supplies under GST, businesses must comply with certain eligibility criteria. One of the key criteria is obtaining the necessary documentation, such as a shipping bill, invoice, and other documents required under the Customs Act, 1962. The exporter must also follow the proper procedure for shipping the goods or services and adhere to the prescribed timelines for filing returns.

To claim the benefits of zero-rated supplies, the exporter must file a refund application under the GST law. The refund application must be filed within two years from the relevant date, as specified under Section 54(1) of the CGST Act, 2017. The relevant date for the purpose of filing a refund claim is either the date of issue of invoice or the date of payment of tax, whichever is later.

The benefits of zero-rated supplies under GST for businesses engaged in exports are manifold. Firstly, exporters can claim a refund of the unutilized ITC on goods or services or both that are used for such supplies. This helps in reducing the cost of exports and enables exporters to compete in the global market. Secondly, the exemption from GST helps in making Indian exports more competitive in the international market, which, in turn, promotes economic growth and development.

However, compliance and documentation-related challenges are some of the key issues faced by businesses engaged in exports. Exporters must ensure that the necessary documentation is in place, and the procedures for shipping the goods or services are followed meticulously. Failure to comply with the prescribed timelines or provide the required documents can lead to delays in processing refund claims or even rejection of such claims. Additionally, the refund process itself can be time-consuming and cumbersome, which can impact the cash flow of businesses.

In conclusion, exports of goods or services are considered zero-rated supplies under GST, and complying with the necessary eligibility criteria is essential for businesses to claim ITC refunds. The benefits of zero-rated supplies for businesses engaged in exports are significant, and it helps in promoting exports and boosting the Indian economy. However, compliance-related challenges and documentation requirements can be a hindrance for businesses, and it is essential to ensure that the necessary procedures are followed to claim the benefits of zero-rated supplies.

Eligibility criteria for supplies to SEZs to be considered zero-rated supplies.

Under the GST law, supplies made to SEZs are treated as zero-rated supplies if the supplier satisfies certain conditions. To avail of the benefit of zero-rating, the supplier is required to furnish an LUT (Letter of Undertaking) or a bond to the concerned authorities. The LUT or bond acts as a guarantee that the supplier will comply with the conditions prescribed by the GST law. Additionally, the supplier must ensure that the goods or services supplied are received by the SEZ unit or developer and are used for authorized operations

3.

Advantages of zero-rated supplies to SEZs

The treatment of supplies made to SEZs as zero-rated supplies provides several benefits to both the supplier and the SEZ unit/developer. The major advantage is that such supplies are exempt from GST, which reduces the cost of goods or services for the SEZ unit/developer. This exemption allows SEZs to become more competitive and attract more investment, leading to increased economic activity and employment opportunities.

Another advantage of zero-rated supplies is that they allow for the smooth flow of credit. The supplier can claim input tax credit (ITC) on the inputs, input services, and capital goods used in the supply of goods or services to SEZs. The ITC can be utilized to offset the GST liability on other supplies or can be claimed as a refund.

In addition to the benefits, zero-rated supplies to SEZs also pose some challenges related to compliance and documentation. The supplier must comply with the conditions prescribed by the GST law to avail of the zero-rating benefit. These conditions include obtaining an LUT or bond, maintaining proper documentation, and following the prescribed timelines for filing returns. Any non-compliance with the conditions can lead to the denial of the zero-rating benefit and may result in penalties.

The zero-rating of supplies made to SEZs is a significant provision under the GST law that aims to promote exports, attract foreign investment, and create employment opportunities. The treatment of such supplies as zero-rated supplies provides several benefits to both the supplier and the SEZ unit/developer. However, compliance with the conditions prescribed by the GST law is essential to avail of the zero-rating benefit. As SEZs continue to play a crucial role in India’s economic growth, the significance of zero-rated supplies to SEZs is likely to increase.

GST on capital goods

GST on capital goods

According to section 2(19) of the CGST Act Capital Goods means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

Input Tax Credit on Capital Goods

To avail input tax credit for the Capital Goods the following conditions, in addition to conditions as stated under section 16(2) of the CGST Act, are to be fulfilled.

1. The Capital Goods has been capitalised in books of account of the person and

2. The Capital Goods are used or intended to be used in the course or furtherance of business.

The conditions as stated under section 16(2) of the CGST Act are as under:

1. The registered person is in possession of Tax Invoice.

2. The registered person has received Capital Goods.

3. The tax charged on such capital goods has been paid and 

4 The GST Return has been filed in regard of such of Capital Goods by the Supplier.

The further condition as stated in section 16(3) is that where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of1961), the input tax credit on the said tax component shall not be allowed.

Blocked Input Tax Credit – Input Tax Credit is blocked on Motor Vehicles, Vessels and Aircrafts subject to exceptions as per section 17(5) of the CGST Act.

Total amount of Input Tax Credit is allowed on purchase of capital goods. It is not like with provisions of VAT, Service Tax etc. where input Tax Credit was allowed in instalments year wise

Input Tax Credit not allowed on Capital Goods

The Input Tax Credit is not allowed on Capital Goods on following circumstances:

1. If the Capital Goods are not capitalised in the books of account.

2. If the Capital Goods are purchased for non-business purpose.

3. If the Capital Goods are purchased to be used exclusively for exempt supply.

Circumstances when availed Input Tax Credit against Capital Goods shall be paid.

The Registered Person shall have to pay input tax credit against availed input tax against purchase of Capital Goods in following cases:

1. When the Registered Person shifts from regular registration to Composition Scheme and

2. When the Registered Person gets his registration cancelled.

How much amount shall be paid we should consider section 18(4) of the CGST Act read with rule 44 in the case of shifting from Regular Registration to Composition Scheme and section 29(5) read with rule 44 in the case of cancellation of registration.

Useful Life of the Capital Goods is 5 years.

Credit notes and debit notes under GST

Credit notes and debit notes under GST

Section 34 of the CGST Act plays a crucial role in regulating credit and debit notes in the context of goods and services.

Section 34: Credit and debit note

Section 34(1) of the CGST Act pertains to credit and debit notes. The extract of the section is provided below:

“Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

According to the section 34, a supplier has the option to issue a credit note with GST (referred to as “GST credit note”) on the following grounds:

1. The taxable value or tax charged on the tax invoice is found to be excessive.

2. The goods supplied are returned by the customer (sales return).

3. The goods or services or both supplied are found to be deficient (quality rejection).

The reasons for raising a GST credit note are clearly stated for points 2) and 3) above. However, point 1) is open to cover scenarios such as rate revision or discounts given, among others.

On vivisection of the Section 34(1) of CGST Act, 2017, the following are the scenarios wherein the supplier is obligated to issue Credit notes: for the following reasons: 

i. Taxable Value charged for the supply in the tax invoice is found to exceed the taxable value; 

ii. Tax charged in the invoice is found to exceed the tax payable in respect of such supply; 

iii. Goods suppliers are returned by the Recipient of the goods; iv. Goods or Services or both supplied are found to be deficient Due to the above reasons, the supplier may issue to the recipient one or more credit notes for the supplied made in a Financial Year containing the particulars as prescribed. 

The particulars to be incorporated in the Credit Notes have been notified under Rule 53(1A) of CGST Rules, 2017. The particulars to be incorporated are summarized hereunder: 

a) Name, address and Goods and Services Tax Identification Number of the supplier; 

b) Nature of the document; 

c) A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year; 

d) Date of issue of the document; 

e) Name, address and (GSTIN) Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient; 

f) Name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is un-registered; 

g) Serial number(s) and date(s) of the corresponding tax invoice(s) or, as the case may be, bill(s) of supply; 

h) Value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient; and 

i) Signature or digital signature of the supplier or his authorised representative

Time limit to issue GST credit note:

Section 34(2) provides the time limit for the supplier to issue a credit note with GST.

The extract of the section is provided below:

“Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed.

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest of such supply has been passed on to any other person. “

The above provision sets a time limit for the supplier to issue a GST credit note. The GST credit note must be declared in the GST return to be filed no later than the 30thday of November following the end of the financial year. This means that the GST credit note can be included in the return for the month of October following the end of the financial year to which the corresponding original invoice pertains. In short, the timeline to include the GST credit note is the October return of the following year.

In other words, a supplier cannot declare the details of the GST credit note after the October return.

Afterwards, the supplier can issue a financial credit note (credit note without GST) to settle the accounts.

Furthermore, Section 15(3)(b) provides conditions that the supplier must fulfil to issue a GST credit note.

A GST credit note can be issued if a discount is given.

1. Before or at the time of supply by mentioning it on the invoice.

2. After the supply has occurred, provided that:

The discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to the original invoice.

The input tax credit attributable to the discount is reversed by the customer.

Section 34(1) uses the word “may” for issuing a GST credit note. Section 34(2) provides a time limit to report the GST credit note. Section 15(3)(b) imposes conditions to become eligible to raise a GST credit note on discounts.

Therefore, a GST credit note can only be issued if the conditions are satisfied by the supplier. This means that a GST credit note is conditional and not mandatory.

Time limit for issue 

However, there are practical examples where the issue of credit notes may not be possible within the time frame prescribed. E.g., in case of travel contracts for events, where a travel agent receives money against a supply to be made at the future date, issues and invoice and pays the GST as applicable. It is only after the time period under section 34 of the Act has elapsed, does the travel agent know that the contract is cancelled.

Intermediary – under GST

Intermediary – under GST

Intermediary – a person who arranges/facilitates the supply between two persons in common parlance.

As per   Act, Intermediary means a broker, an agent, or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.

Service Provider: Intermediary/Agent/Broker.

Service Recipient: Any person (In India / Outside India).

Supply: Facilitation of main supply

 

Why is Intermediary service an area of concern for taxpayers? Why do not companies want to be classified as intermediary? Why is it unjust to tax intermediary as per taxpayers?

The Company carrying on business for recipients in non-taxable territory want to buy the reliefs of exports for themselves. If they get classified as intermediary, the place of supply falls in taxable territory by the specific inclusion of intermediary services which many believe to be unjust as the supply is provided to a person outside India and consideration is received in foreign currency.

As per  , the place of the following services shall be the location of supplier of services, namely: –

a) services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders

b) Intermediary services (Emphasis Applied)

c) services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month.

The moot point being classified as taxable services instead of export of services(zero-rated) which brings the supply liable to GST. Tax treatment by government cannot be said to be unjust because the services become liable to tax. Article 286(2) grants power to Parliament to frame laws to regulate such supplies and accordingly, cannot be said to be unconstitutional. Also, as the service provider is in India there is direct nexus of the services in India.

The vexation being relevant to some extent as Revenue Department brings under the umbrella all transactions with slightest point under the ambit of intermediary services. There are numerous rulings/judgements where the companies are made to pay massive amounts of tax, interest, and penalties due to classification of service as intermediary services at a later stage. It is imperative for companies to capture the transaction as intermediary/non-intermediary at initial stage to avoid litigation.

The dissenting judgement by Bombay High Court in Dharmendra M. Jani Vs Union of India to unfavourable Order by Gujarat High Court in Material Recycling Association of India Vs Union of India and numerous other rulings, brought the need for clarification to stabilize taxation of intermediary service. Circular No.159/15/2021-GST dated September 20, 2021, lays down five checks for intermediary services: –

1. Minimum of three parties

2. Two distinct supply: –

3. Main Supply- between the two principles i.e., supplier and customer

4. Ancillary Supply- between agent and principle i.e., facilitating the main supply

5. Intermediary service provider to have the character of an agent, broker, or any other similar person- i.e., the agent/broker should facilitate the main supply

6. Does not include a person who supplies such goods or services or both or securities on his own account- i.e., a supplier supplying on principle-to-principle basis; and

7. Sub-contracting for a service is not an intermediary service- Where the main supply is sub-contracted and not facilitated between the customers.

Conclusion

Even after clarification by government, the companies need to check whether they will pass the test laid down by the Circular and draft their agreements with utmost clarity to avoid any litigation.

Understanding E-commerce Operators under GST

Understanding E-commerce Operators under GST

In the rapidly evolving world of online commerce, electronic marketplaces have become instrumental in facilitating seamless transactions between buyers and sellers. With the advent of E-commerce, governments worldwide have been adapting their tax systems to keep pace with the digital economy. In India, the GST was introduced on July 1, 2017, and it brought about significant changes for E-commerce operators. 

What is an E-commerce Operator?

An E-commerce operator refers to any person or entity that owns, operates, or manages a digital platform that facilitates the supply of goods or services between suppliers and customers. Popular E-commerce platforms like MDND, Amazon, Flipkart, and eBay are classic examples of E-commerce operators. These operators act as intermediaries, bringing sellers and buyers together and facilitating transactions.

GST Registration of E-commerce Operator

E-commerce operators are required to register under GST, regardless of their turnover. They must obtain a unique Goods and Services Tax Identification Number (GSTIN) for each state where they operate. E-commerce operators must electronically apply for registration, duly signed, or verified through Electronic Verification Code (EVC), using the form GST REG-07. This is to be done either directly on the GST portal or from a facilitation center notified by the Commissioner.

When is the E-Commerce Operator liable to pay GST?

 The liability of an E-commerce operator to pay GST arises under the following circumstances:

1.Tax Collection at Source (TCS):

Under Section 52 of the Central Goods and Services Tax (CGST) Act, 2017, E-commerce operators are required to collect Tax Collection at Source (TCS) 0.5% CGST, 0.5% SGST from the consideration received by sellers from customers. This TCS is collected by the operator on behalf of the government.

The collected TCS is reflected in the electronic cash ledger of the supplier, and they can utilize it for discharging their GST liability when they file their GST returns.

2. Commission charged by E-Commerce operator:

An E-Commerce transaction is undertaken between three parties, i.e., the supplier, the buyer, and the E-Commerce operator.

Supply of goods and services happen between supplier and buyer using an E-commerce platform. For this, the e-commerce operator charges commission on which GST is applicable SAC 9962.

3.GST Payable under section 9(5) of the CGST Act 2017:

Section 9 (5) of the CGST Act is a special case where liability of tax falls on the e-commerce operator and he is treated as if he is the supplier of those services. This includes passenger transport services, housekeeping services, restaurant services (includes cloud kitchens) and accommodation services.

The e-commerce operators will be required to pay tax under the reverse charge method, regardless of whether the supplier is registered under GST. The actual supplier of those services under this section is entitled to a threshold exemption.

As the e-commerce operator himself is liable for collection and deposit of GST, there is no question of TCS U/s 52.

Returns to be submitted by E-Commerce Operator

1.GSTR-8:

GSTR-8 is a return to be filed by the e-commerce operators who are required to deduct TCS (Tax collected at source) under GST. GSTR-8 contains the details of supplies effected through e-commerce platform and amount of TCS collected on such supplies.

GSTR-8 filing for a month is due on 10th of the following month. For instance, the due date for GSTR-8 for June is on the 10th of July.

2.GSTR-9B:

Every electronic commerce operator required to collect TCS under section 52 shall furnish Annual Statement in Form GSTR – 9B.

3. GSTR-1 and GSTR-3B:

ECOs shall also be required to furnish their regular returns for commission income, fees or other charges as the case may be. This return is to be filed in Form GSTR-1 and GSTR-3B.

4. GSTR-9 and GSTR-9C:

An ECO whose aggregate turnover during a financial year exceeds five crore rupees shall also be liable to furnish an Annual Return (GSTR-9) along with a self-certified Reconciliation Statement (GSTR-9C).

If it exceeds two crore rupees but up to five crore rupees then he shall be liable to furnish GSTR-9 only and if it is up to two crore rupees then both GSTR-9 and GSTR-9C are not mandatory.

Impact of GST on E-commerce Operators

1.Improved Compliance:

GST has ushered in a unified tax system that simplifies compliance for E-commerce operators. By providing a centralized registration and tax collection mechanism, it has reduced the complexity associated with dealing with multiple state taxes.

2. Level Playing Field:

With GST, the distinction between online and offline businesses has reduced, creating a more level playing field for all market players. This has encouraged healthy competition and fostered the growth of the e-commerce sector.

3. Increased Tax Revenue:

The implementation of GST has widened the tax base and increased tax revenues for the government. This additional revenue can be channelled into development projects and public welfare initiatives.

Notification No. 34/2023- Central Tax dt 31st July,2023: - CBIC notifies waiving of the mandatory GST Registration Requirement for persons supplying goods through Electronic Commerce Operator

Under this notification, persons making supplies of goods through ECOs, who have an aggregate turnover within the specified limit, are exempted from GST registration. To avail such exemption, certain conditions are required to be fulfilled. 

1. such persons shall not make any inter-State supply of goods. 

2. such persons shall not make supply of goods through electronic commerce operator in more than one State or Union territory. 

3. such persons shall be required to have a Permanent Account Number issued under the Income Tax Act, 1961 (43 of 1961). 

4. such persons shall, before making any supply of goods through electronic commerce operator, declare on the common portal their Permanent Account Number issued under the Income Tax Act, 1961 (43 of 1961), address of their place of business and the State or Union territory in which such persons seek to make such supply, which shall be subjected to validation on the common portal.

5. such persons have been granted an enrolment number on the common portal on successful validation of the Permanent Account Number declared as per clause (iv). 

6. such persons shall not be granted more than one enrolment number in a State or Union territory. 

7. no supply of goods shall be made by such persons through electronic commerce operator unless such persons have been granted an enrolment number on the common portal; and 

8. where such persons are subsequently granted registration under section 25 of the said Act, the enrolment number shall cease to be valid from the effective date of registration.

Notification No. 37/2023- Central Tax, Dt 04th August, 2023: – Special procedure to be followed by the electronic commerce operators in respect of supplies of goods through them by unregistered persons

As per this notification, Electronic Commerce Operators shall: 

1. allow the supply of goods through it by the said person only if enrolment number has been allotted on the common portal to the said person. 

2. not allow any inter-State supply of goods through it by the said person.

3. not collect tax at source under sub-section (1) of section 52 in respect of supply of goods made through it by the said person; and 

4. Furnish the details of supplies of goods made through it by the said person in the statement in FORM GSTR-8 electronically on the common portal. Where multiple electronic commerce operators are involved in a single supply of goods through electronic commerce operator platform, “the electronic commerce operator” shall mean the electronic commerce operator who finally releases the payment to the said person for the said supply made by the said person through him.

Notification No. 36/2023- Central Tax dt 04th August, 2023: - Special procedure to be followed by the electronic commerce operators in respect of supplies of goods through them by composition taxpayers As per this notification, Electronic Commerce Operators shall: 

1. not allow any inter-State supply of goods through it by the said person. 

2. collect tax at source under sub-section (1) of section 52 of the said Act in respect of supply of goods made through it by the said person and pay to the Government as per provisions of sub-section (3) of section 52 of the said Act; and 

3. furnish the details of supplies of goods made through it by the said person in the statement in FORM GSTR-8 electronically on the common portal.

GST Reconciliation

GST Reconciliation

GST reconciliation stands as a pivotal task for businesses across India, regardless of their scale. 

This critical process involves cross-checking GST data extracted from various sources like invoices, purchase orders, and bank statements to guarantee its precision and entirety. 

The intricacies of this task often make it time-consuming, particularly for enterprises dealing with high transaction volumes.

However, despite its complexities, GST reconciliation remains indispensable. Compliance with GST regulations hinges on this process, crucial for evading substantial penalties. 

Moreover, it enables businesses to maintain an accurate financial trail, identifying potential errors or discrepancies along the way.

A Proper Explanation of GST Reconciliation

GST reconciliation process serves to pinpoint errors or omissions, allowing for timely rectification.

The primary objective is to ensure consistency between your recorded invoices and purchases and the data conveyed to the GST authorities.

This synchronization guarantees the rightful claiming of tax credits, minimizing complications during return filings. By maintaining this harmony, you maximize the utilization of input tax credits, avoiding discrepancies and securing the full benefits entitled to you.

Why GST Reconciliation is Critical?

For various reasons, GST reconciliation is critical these are-

Tax Compliance: GST reconciliation is pivotal for businesses in upholding compliance with GST regulations. This holds immense significance as non-compliance can lead to substantial penalties.

 : Ensuring the accuracy and completeness of GST data through reconciliation serves dual purposes—supporting both financial reporting and tax requirements.

Tax Fraud Deterrence: Moreover, GST reconciliation acts as a deterrent against fraud. By scrutinizing invoices for duplications or unauthorized issuances, businesses can thwart potentially fraudulent activities.

ITC Optimization: Furthermore, this process facilitates businesses in rightfully claiming Input Tax Credit (ITC) for the GST paid on their purchases. Accurate ITC claims to aid in mitigating overall GST liabilities, contributing significantly to financial management.

Fixed Economic Management: By enabling precise financial tracking, GST reconciliation empowers businesses to enhance their financial decision-making and bolster their profitability.

Main Issues of GST Reconciliation

GST reconciliation often poses a significant challenge for both accountants and businesses alike. The intricacies of this process, especially for enterprises dealing with high transaction volumes, make it complex and time-intensive. Additionally, even minor errors can result in hefty penalties.

Let’s explore some prevalent issues encountered by accountants and businesses during GST reconciliation:

Manual Reconciliation Remains Prevalent: Many businesses rely on manual methods for GST returns, a laborious and error-prone process, especially when handling numerous invoices.

Data Fragmentation Persists: GST data scattered across diverse systems like accounting software, e-commerce platforms, and ERP systems hampers obtaining a comprehensive and accurate overview of all GST transactions.

Invoice Matching Challenges Persist: Matching supplier invoices with corresponding ITC claims in GST returns remains arduous, particularly with a high volume of invoices.

Complex Compliance Tracking: The intricacies and dynamic nature of GST compliance pose challenges in keeping abreast of the latest regulations and requirements.

Limited Visibility Hampers Insights: Manual reconciliation impedes real-time visibility into GST data, making it challenging to promptly identify and rectify errors.

Important reconciliations

• Purchase Register and GSTR-2A.

• Sales Register and GSTR-1

• GSTR-3B and GSTR-1

• GSTR-2B and GSTR-3B

• Input Tax Credit (ITC)

• E-way Bills and Invoices

• Annual Returns and Monthly/Quarterly Returns

• Supplier-wise GST Reconciliation

Show Cause Notices under GST

Show Cause Notices under GST

1. Acknowledgment of Notice

• Notice Dates: There may be a difference between the date of the GST notice and the date of its receipt. Always note the date and time when acknowledging the receipt of the SCN.

• Avoidance is Not an Option: Ignoring an SCN is not advisable. Receipt and then a response or contestation is the correct approach. Not acknowledging an SCN is considered equivalent to having received it.

2. Responding to Time-Barred Notices

• Challenging Time-Barred SCNs: If the service of notice is beyond the permissible period, it can be contested with appropriate evidence.

• Extended Time-Period Rule: For SCNs issued after Section 73 timelines, it is essential to demonstrate that there was no concealment or suppression of facts, preventing the department from extending the SCN issuance period to maximum 54 months. The intention to evade tax is mandatory and this has to be proved by the Department.

3. Proactive Measures

• GST Payment before Notice: If there's an anticipation of a SCN and you believe GST is due, it's advisable to pay the tax before the issuance of the SCN. This saves from Penalty.

• Hearing Rights: When an SCN seeks to increase liability or reduce refunds, the assessee must be given an opportunity to be heard, a right that cannot be denied. Section 75(4) makes it clear that before passing any adverse order, hearing is must. Few High Courts have even held that personal hearing is must even when it’s not requested before passing adverse opinion.

4. Legal and Factual Challenges

• Validity of SCN: The legality and validity of an SCN can be challenged based on facts, timing, monetary limit or jurisdiction.

• Written Format: SCNs are always issued in writing. Verbal notices are not recognized under GST law.

• Mention of Amounts: An SCN must specify the demanded amount and any proposed penalty. An SCN without these details is invalid. Orders cannot be passed for amounts greater than those specified in Notice.

5. Specificity and Scope

• Period Specificity: SCNs should be specific to a particular period. Even if a demand is raised and paid, an SCN for a subsequent period is necessary.

• Scope Limitation: The department cannot adjudicate issues not mentioned in the SCN. The Order has to be within "four corners" of the notice.

6. Timely and Detailed Responses

• Stipulated Timeframe: Responses to SCNs should be within the time mentioned in the notice.

• Extension Requests: It's advisable to request an extension or adjournment if needed.

• Comprehensive Reply: Responses should address all points in the SCN and be supported by documentary evidence and relevant case laws. For Notice issued in DRC-01 the Form for Reply is DRC-06. For Notice in Part-A of DRC-01A, the reply has to be submitted in Part-B of DRC-01A.

7. Personal Hearing and Further Options

• Personal Hearing: Even after submitting a detailed response, seek a personal hearing to amend or modify your response during adjudication.

• Alternative Relief Measures: In cases of penalties, demands, or revocation of refunds, explore options for relief based on reasonable cause for non-compliance.

8. Right to Appeal and Professional Assistance

• Appealability: Orders issued against an SCN can be appealed.

• Professional Help: If personal representation is challenging, hiring a professional for drafting responses and representation is advisable.

9. Importance of Defence

• Foundation for the Future: Proper defence and argumentation in response to SCNs are crucial as they lay the groundwork for any future actions or appeals. As Show Cause notice is considered to be foundation of the case, the first reply is the foundation of the Litigation and defence.